BetterLawNotes-5 (2)

CONTRACT LAW

As already noted, an actual breach of contract will only give rise to a right to terminate if the primary obligation breached is (i) a condition or (ii) innominate and the consequences are sufficiently serious.

By contrast, it seems that, in the context of anticipatory breach, the test as to whether a right to terminate arises (and whether there is an anticipatory breach in the first place) is different and narrower.

According to the House of Lords in the Afovos case, an anticipatory breach (and hence a right to terminate) will only arise where the consequences of non-performance of the primary obligation which the guilty party is refusing, or will otherwise be unable, to perform would be such as to deprive the innocent party of substantially the whole benefit which the parties had intended that the innocent party would derive from the primary obligations remaining to be fulfilled.

It follows that a threat not to perform a primary obligation which is a condition of the contract when the time for performance of that term falls due, may not amount to an anticipatory breach. It will only do so where the effect of the non-performance of the condition would deprive the victim of substantially the whole benefit which the parties had intended that the victim would derive from the primary obligations remaining to be fulfilled.

The Afovos [1983] 1 Lloyd’s Rep 335

By a time charter the owner let its vessel Afovos to the charterer for a period of two years three months more or less at the charterer’s option. Clause 5 of the charter provided for payment of hire to be made semi-monthly in advance. Clause 31 provided that when hire was due and not received the owner would give the charterer 48 hours’ notice before exercising the option of withdrawing the vessel.
On June 11, 1979, the charterer gave instructions to its bank to remit the instalment of hire due on June 14, to the owner’s bank. However, the telex sent by the charterer’s bank never arrived at the owner’s bank, having sent by mistake to the wrong addressee. On June 14 at 16 40 hours the owner’s agent sent to the charterer a telex message stating that it had been instructed by the owner to give notice as per clause 31 of the charter for withdrawal of the vessel in case the hire which was due that day was not received. Payment was not actually received until June 19. The owner sought a declaration that it was entitled to withdraw the vessel.
The House of Lords held that, on a proper construction of the charter, the charterer had had until midnight on June 14/15 to make payment. A notice under clause 31 could not be given until after that time. Accordingly, the notice given on June 14 was invalid and the owner was not entitled to withdraw the vessel.
One argument which the owner relied on was that by misdirecting the telex, the charterer’s bankers had made it impossible for the charterer to make payment in time: in other words, the effect of mis-directing the telex was to bring about an anticipatory breach.

Lord Diplock, with whom all the other Law Lords agreed, explicitly rejected this argument:

‘The doctrine of anticipatory breach . . . applies only to fundamental breach. If one party to a contract states expressly or by implication to the other party in advance that he will not be able to perform a particular primary obligation on his part under the contract when the time for performance arrives, the question whether the other party may elect to treat the statement as a repudiation depends upon whether the threatened non-performance would have the effect of depriving that other party of substantially the whole benefit which it was the intention of the parties that he should obtain from the primary obligations of the parties under the contract then remaining unperformed. If it would not have that effect there is no repudiation, and the other party cannot elect to put an end to such primary obligations remaining to be performed. The non-performance threatened must itself satisfy the criteria of a fundamental breach.

Similarly where a party to a contract, whether by failure to take timeous action or by any other default, has put it out of his power to perform a particular primary obligation, the right of the other party to elect to treat this as a repudiation of the contract by conduct depends upon whether the resulting non-performance would amount to a fundamental breach. Clearly, in the instant case delay in payment of one semi-monthly instalment of hire would not.’

(At 341-342).

Note that not everyone agrees with the approach set out in the Afovos. Professor Peel, for example, suggests that, as is the case with actual breach, any threatened breach of a condition ought to amount to an anticipatory breach: see Peel, Treitel’s Law of Contract 15th edn at 17-087.

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